Following a spate of repo rate cuts by the RBI in recent months, fixed deposits no longer remain as attractive as they used to be just sometime back. So, what to do?
While PSBs’ WALR on outstanding loans fell by 69 bps between February and November 2020, for private banks the rate fell 59 bps. Representative Image
Following a spate of repo rate cuts by the RBI in recent months, fixed deposits no longer remain as attractive as they used to be just sometime back. In fact, some of the leading public and private sector banks – including the State Bank of India, ICICI Bank and HDFC Bank – have in recent months slashed the FD interest rates so much that they now appear to be at par with the interest rates offered by many banks on their savings bank accounts.
Strangely, interest rates on savings bank accounts, offered by some smaller private sector banks and small finance banks, are even higher than the FD rates offered by the bigger private sector banks and PSU banks. However, the interest rates on savings accounts offered by smaller private sector banks and small finance banks usually vary, depending on the balance kept in them.
Banking experts say a large number of PSU and private banks are currently offering interest rates between 2.5 per cent and 5.5 per cent on their fixed deposits, depending on the investment tenure, and up to 6 per cent for senior citizens. On the other hand, some small finance banks and smaller private sector banks are offering between 3 per cent and 7.25 per cent interest rates on their savings accounts. Thus, it can well be said that some savings accounts are currently offering higher interest rates than the FDs of a large number of banks.
However, before you rush to put your hard-earned money in these high-yield savings accounts, there is a catch. In most cases, higher interest rates are offered only on savings account balances within a certain threshold amount.
“The interest rates offered on savings accounts by some small finance banks and smaller private sector banks are higher than the FD interest rates offered by public sector banks and major private sector banks. However, such higher interest rates on savings accounts are only offered on savings account balances within a certain threshold amount. Hence, depositors should calculate the average interest income from such savings accounts before choosing between fixed deposits and high yield savings accounts for parking their surpluses,” says Sahil Arora, Director, Paisabazaar.com.
Depositors should also remember that while interest income from fixed deposits is taxable as per the tax slab of the investor, Section 80TTA provides a deduction of Rs 10,000 on the interest income earned from the savings account. Hence, deposits in high yield savings accounts can generate higher post-tax returns than fixed deposits of various banks for those in the higher tax slabs.
“Low-risk investors can spread their savings account deposits across multiple banks offering high yield savings accounts to maximize the benefit of deposit insurance cover offered by DICGC, an RBI subsidiary. As per the deposit insurance program, cumulative bank deposits (including savings, current, fixed and recurring deposits) of up to Rs 5 lakh per customer in each bank are protected, in case of bank failure,” says Arora.
Whatever be the case, if you are keen to put your money in high-yield savings accounts, here are a few of them: